Drug Scandals Keep Flowing: Time for New Thinking

Stories of abuses related to the pharmaceutical industry fill the newspapers on a regular basis. The latest involved Zyprexa, a drug used to treat schizophrenia. It turns out that the drug has harmful side effects, such as contributing to diabetes. This was information that the manufacturer, Eli Lilly, knew but chose not to share with doctors, because it might discourage usage. It turns out that Eli Lilly was also promoting the drug for off-label uses - uses for which it has not received approval from the Food and Drug Administration.

This story appeared the day after it was revealed that there had been a sharp decline in the incidence of breast cancer among older women. Researchers attributed this decline to a drop in the use of hormone replacement treatment (HRT) for menopause. While the reduction in the incidence of breast cancer is certainly good news, it begs the question as to why so many women were getting HRT in the first place. The answer, at least in part, is that drug companies promoted HRT because they stood to make large profits.

These two scandals are just the small tip of a very large iceberg of scandals involving the prescription drug industry. The problem is basic to the industry's economic model; it relies on government patent monopolies to charge prices for its drugs that are far above the actual cost of production.

The dirty secret about prescription drugs is that they are cheap. Wal-Mart has done a great public service by making a large number of generic drugs available at $4 per prescription. Not only does this save customers money, it also tells us how much it actually costs to manufacture and distribute drugs. After all, Wal-Mart is a business, not a charity. If it sell drugs at $4 a prescription, it must think that it can make a profit at this price.

The only difference between the generic drugs that Wal-Mart sells for $4 and the brand drugs that can cost hundreds of dollars for a prescription is that the expensive brand drugs are protected by patents. Otherwise, they could also be profitably sold for $4 per prescription.

Of course, drug patents serve a purpose. The high prices that the industry charges for patented drugs allow it to recoup the cost of research. Without patent protection, they would have little incentive to spend the money needed to develop new drugs.

But, just as patent-inflated prices give an incentive to carry through research, they also give incentives to promote drugs, whether or not they are the best treatment for patients. This often means exaggerating their potential benefits, and it can also mean concealing evidence of potential dangers. Patent-inflated prices also give drug companies incentives to entice doctors to prescribe their drugs - through vacations, attractive sales agents, and even outright kickbacks.

Patent-inflated prices also provide incentives to use the legal system to fend off generic competition as long as possible, and to pay off politicians to allow the maximum benefit from the patent. Economists know that when the government creates a monopoly, allowing firms to charge prices far above the actual cost, corruption is almost sure to follow.

It is long past time that we looked to alternative mechanisms for finance pharmaceutical research. This idea should not sound far-fetched. The government is already spending $30 billion a year financing biomedical research through the National Institutes of Health. One option is to simply expand the amount that the government spends on research. This research funding could even be contracted out to private drug companies, with effective researchers getting their contracts renewed. The difference with the current system is that patents from the new drugs would be placed in the public domain, so that Wal-Mart could sell them for $4 a prescription.

Another option is to have a prize system to reward effective res?arch. Under this system, the industry could carry through research as it does today, but its patents would be bought by the government at a price determined by usefulness of the drugs. If a drug became widely used, and saved or improved the quality of many peoples lives, then the developer would get a large prize. The patent would also be placed in the public domain in this system, so Wal-Mart could sell these drugs for $4 per prescription.

There have been bills introduced in Congress that would establish both types of systems. There are undoubtedly other ways in which we could pay for prescription-drug research, but the key is get a debate started. The abuses of the current system are rampant. The fact that millions of people in the United States and billions around the world have trouble paying for drugs is almost entirely a result of the patent system. We can do better; we just have to make the effort.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.